An appraisal gap is the space between what you agreed to pay for a home and what the appraiser says it's worth. If you sign at $400,000 and the appraisal comes back at $385,000, the gap is $15,000. Lenders size every loan from the lower of the price or the value, so that $15,000 can't be borrowed.
The appraisal entry covers how the value is set. This entry is about the gap itself: what it costs you and the contract language buyers use to plan for it.
Why the gap becomes cash
Each program caps your loan-to-value, the loan divided by the home's value. FHA allows 96.5%, Conventional up to 97% on a single-family home through first-time buyer programs and 95% at 5% down, and VA up to 100%. When the appraisal is low, the cap applies to the appraised value. Your income and approval stay the same, and the money that used to come from the loan has to come from somewhere else.
That gap counts as part of your down payment. Savings and gift funds from family can cover it. A seller credit can't, since seller credits are limited to closing costs and prepaids.
A $400,000 Conventional purchase that appraises at $385,000
A buyer plans 5% down on a $400,000 single-family home.
| Appraised at $400,000 | Appraised at $385,000 | |
|---|---|---|
| Loan at 95% of the lower number | $380,000 | $365,750 |
| Buyer's cash at a $400,000 price | $20,000 | $34,250 |
The buyer now needs $14,250 more, which is the $15,000 gap minus the $750 smaller down payment on the lower value (5% of $15,000). If the seller drops the price $5,000 to $395,000, the loan stays at $365,750 and the buyer's down payment becomes $29,250, or $9,250 more than the original plan.
Appraisal gap clauses and your protections
An appraisal gap clause is a promise in your offer to cover a low appraisal up to a stated amount, such as $10,000. Sellers like it because the deal is less likely to fall apart. Write one only for an amount you could pay from savings or a documented gift.
Your safety net depends on the loan. FHA requires an amendatory clause, and VA requires a similar one, letting you cancel and keep your earnest money when the value is below the price. On a Conventional loan, the appraisal or financing contingency in your contract does that job until its deadline passes.
Before you give up on a home, your agent can send the appraiser stronger nearby sales through a reconsideration of value, and many sellers lower the price because the next buyer's appraisal will likely say the same thing.
Run your cash with a lower value in the cash to close calculator. To decide how much gap coverage your savings can back before you write the offer, call AAA Capital Funding at 888-601-8344.